EU unveils plan to ban banks' proprietary trading

BRUSSELS--The European Union has unveiled a much-delayed plan to rein in banks' proprietary trading and give supervisors the power to split off risky trading activities from safer lending operations in an effort to tackle the risks posed by banks that are deemed "too big to fail."

But following pressure from the banking industry, the proposal stops far short of a forced separation of retail banks from investment banks that was advocated 15 months ago by an EU-appointed group of experts. Officials said the plan was unlikely to be adopted any time soon given that the European Parliament--which must ratify any agreement--is set to dissolve ahead of elections in May.

"It is certainly not satisfactory to bring something out when the last date for accepting legislation was last July," said Sharon Bowles, chairwoman of the European Parliament's influential economic affairs committee. "Nothing will happen on [this] in this Parliament."

Michel Barnier, the EU commissioner responsible for the proposal, admitted Tuesday that the text wouldn't be voted on until the end of this year or early next year.

The blueprint by the European Commission, the EU's executive arm, is the final piece in Europe's lengthy overhaul of its banking system in the wake of the financial crisis, a process that has encompassed fatter capital cushions, bonus caps for bankers and plans for a euro-zone banking union.

Wednesday's proposal is aimed narrowly at a problem that hadn't yet been addressed by the cascade of new EU regulations--so-called "too-big-to-fail" banks, which benefit from lower funding costs because investors assume governments will bail them out rather than let them collapse. It seeks to harmonize laws that have already been adopted in several EU countries to deal with too-big-to-fail institutions, including Germany, France and the U.K.

The commission plans to impose an outright ban on proprietary trading by about 30 of the region's biggest banks, following the example set by the Volcker rule in the U.S., although the latter will apply to all banks. Europe's 30 biggest lenders include HSBC in the U.K., Deutsche Bank and France's BNP Paribas.

While proprietary trading has declined dramatically at Europe's biggest banks since the financial crisis, the Commission's proposal aims to ensure that lenders don't revert to old trading habits once markets recover.

National supervisors would also be allowed to force banks to wall off certain investment activities, including market-making and derivatives trading, from deposit-taking. But the retail bank would still be allowed to carry out various risky trading activities, within limits set by supervisors.

"The proposed measures will further strengthen financial stability and ensure taxpayers don't end up paying for the mistakes of banks," Mr. Barnier said.

However, the "very broad powers" granted to national supervisors to decide whether to impose additional ring-fencing on banks' trading activities could lead to "inconsistencies between these rules and those in operation elsewhere," said Clifford Smout, a regulatory strategist at Deloitte in London.

Sven Giegold, a European lawmaker and financial spokesman for the Green Party, complained that the Commission had caved in to the banking lobby and watered down Mr. Liikanen's proposal "beyond recognition." The proposal will "probably have no noteworthy impact on the stability of the banking sector and barely reduce the subsidies" provided by taxpayers to the region's biggest banks, Mr. Giegold said.

Under pressure from the banking industry, the Commission backed away from a strict separation of investment banking from retail banking that was advocated 15 months ago by a group of experts led by Finnish central bank governor Erkki Liikanen. Mr. Liikanen had called for a mandatory separation of banks' proprietary trading, market making and other risky trading activities into a separate legal entity with its own capital.

But the banking lobby warned that any radical move to break up the banks might harm their ability to support Europe's still-faltering economic recovery, and spark an exodus of business toward more favorable jurisdictions.

"It was notably important to strike the right balance and not impinge on banks' possibilities to finance the real economy," the Commission said.

Bank lobbyists reacted angrily to even the more limited proposal. The European Banking Federation said it was "deeply concerned" about the "untimely" proposal.

The Commission also proposed rules aimed at breathing transparency into the shadow banking sector, which performs a similar function to banks but is less strictly regulated.

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